ODI calls for VAT hike on energy bills (updated: ODI fights back)

In a brave move, the Overseas Development Institute – which bills itself as the UK’s leading international development think tank – has called for George Osborne to use his Autumn Statement to announce plans to quadruple the rate of VAT on household energy bills.

Despite sustained pressure for bills to be lowered to address a ‘cost of living’ crisis, ODI believes the Chancellor should raise VAT from 5% to the standard rate of 20%, bringing more than £4 billion into Treasury coffers.

According to an ODI spokesperson:

It is unconscionable that a young man should have to pay 20% to buy a copy of Grand Theft Auto 5 in order to wind down after a hard day in the City by slaughtering virtual representations of old ladies, when real life old people are able to pay only 5% to heat their homes.  This ‘warmth subsidy’ must end now.

If successful, ODI plans to campaign for the abolition of the Winter Fuel Allowance, saving another couple of billion. It will then call for a flat rate of VAT on all products, ending subsidies for reading and eating (both books and food are zero-rated).

Supporting this move…OK, enough snark. You didn’t really think that ODI wants  consumers to have to pay more VAT on energy  did you?

Well, actually it does. Today, it published a report slamming the UK and other G20 governments for subsidizing fossil fuels.  Here’s the Guardian’s  coverage:

The figures from the Overseas Development Institute suggest that Britain is now the world’s fifth largest subsidiser of fossil fuels after the US, Russia, Australia and Germany despite commitments to cut carbon emissions and reduce “perverse” fossil fuel subsidies. In 2011, the latest year for which data is available, Britain gave tax breaks of £280m to oil and gas producers and reduced VAT on fossil fuels by several billion pounds, says the thinktank’s report.

I covered the absurdity of this argument the last time a group attempted to garner some cheap publicity stimulate public debate in the run to the annual end-of-year climate talks. Please do read it in full, but here are the main points.

The UK hardly provides any direct subsidies for fossil fuel producers. Instead, it milks them (quite rightly) for substantial additional taxes. The so-called ‘subsidy’ results from the fact that it taxes some producers more heavily than others (large oil fields pay more than smaller ones, for example).

Here’s an analogy. Say I imposed a tax on fruit at £1 per apple and 50p per orange.By the logic ODI uses, I am not taxing fruit, I am subsidising it, as not all fruit is treated equally.

Then there are consumers, who receive 90% of the UK’s ‘fossil fuel subsidy’ because VAT is not levied on energy at the full rate.  This preferential rate, however, applies equally to household energy that is derived from fossil fuels and from renewables. It’s not actually about fossil fuels at all.

(By this logic, by the way, the Winter Fuel Allowance for pensioners is an even more egregious ‘fossil fuel’ abuse. It puts money directly into the pockets of shivering elderly consumers after all.)

I first unpicked this because – like you! – I was appalled to read that the UK spent so much on subsidising fossil fuels despite the need to tackle climate change. But then I discovered, the underlying arguments were utterly bankrupt.

What we need, I think, is a completely new data that offers a rounded picture of how much fiscal pressure countries are placing on fossil fuels versus other energy sources, with taxes (and any reduction in these taxes) and direct subsidies all included. Regulatory pressure could be added in as well, if it can be measured.

But, until then, a moratorium on these misleading ‘subsidy’ reports, please!

Update: ODI’s Media and Public Affairs Officer, Jonathan Tanner sends this riposte:

Trying carefully not to choke on the made up words David has cheekily chosen to put in our mouths there are a few things it’s probably worth pointing out in response to the above.

Firstly, the report is about global fossil fuel subsidies. About two sentences are devoted to Britain in the whole thing. The scale of global subsidies is eye-opening – over $500 billion a year and in some countries running to twice the healthcare budget – or even outstripping the scale of the fiscal deficit in others. When governments are taking decisions about this much money it demands attention and discussion – so it’s good that’s happening.

Before a direct response on the detail, let’s stop for a minute and think about the bigger picture. These subsidies – whether they take the form of tax breaks or hand-outs – are making it easier to buy and sell high-carbon energy which we know is contributing to dangerous climate change. The maths are simple – and our carbon budget is going to bankrupt us. What the existing system does is prop up the business model of huge energy companies that are making huge profits. So we’re shooting ourselves in the foot but it gets worse. We’re shooting ourselves in both feet by failing to create an investment environment that encourages a shift to greener energy.

Now the domestic politics of this are definitely tricky.

David is right that a sizeable chunk of the subsidies discussed here are spent on trying to hold down the cost of fuel – whether it is for electricity, heating or for transport. So by calling for them to removed does it follow that bills should go up? Not necessarily.

Governments (and businesses and NGOs) can take steps to encourage people to moderate their energy use. They can also ensure that more energy comes from green sources, which are getting less expensive every day, and that over time (like fossil fuels) shouldn’t require subsidy. If bills do need to go up then support needs to be found to ensure the poorest are not priced out – but let’s face it, ahead of a winter where many elderly will be forced to choose between heating and eating,  a bold defence of the way things are does this debate a disservice.  A discussion about the way things should be would be much more welcome.

Let me make a few points in response:

  1. If ODI wants to make the argument for increased taxes on household energy, it should do that. The Major government began to harmonize VAT on domestic energy in 1993 in order to plug the deficit and to increase energy efficiency. It managed to raise rates from zero to 8%, but was forced to back down after it faced a rebellion in the Commons. Gordon Brown then trimmed VAT back to 5% due to the disproportionate impact on the poorest. But this is a tax on energy, not fossil fuels, as renewables are covered, and ‘framing’ it as simply abolishing a subsidy is not going to fool anyone once there is any prospect of it happening.
  2. As I said in my first post on this, I think VAT on energy should go up. Both gas and electricity are cheap in the UK when compared to the rest of Europe, despite recent price rises. I’d also abolish the winter fuel allowance and either increase benefits for the poorest or introduce tiered energy pricing (rates increase the more you consume), which I’d combine with a radical approach to competition. As Jonathan says, however, the domestic politics of this are ‘challenging’ – and I simply don’t buy his argument that we can add VAT and magic the pain away.
  3. On the international picture, I came to the ODI report through the Guardian’s coverage, which led on how British ‘subsidies’ were killing its low carbon economy: “£2.6bn yearly incentive favours investment in carbon at the expense of green energy.” I’d bet 95% or more of readers misunderstood what ‘subsidy’ means when they read that line. I certainly did when I first looked into this a year ago. Neither would many work out that the ‘subsidy’/tax break applies to the ‘green economy’ as much as it does the carbon one or that the analysis completely fails to account for an array of other taxes on fossil fuels (petrol, for example, with an implied carbon tax rate of around €250/tCO2).
  4. As for other countries in the ODI report, I am left not knowing whether their ‘subsidies’ are real or if they are calculated in a way that allows one to be compared to another. I’d love to find out. But really, we need a new number – an effective price of carbon or implicit net carbon taxation rate – if we’re to have any true understanding of what signals energy consumers are getting across the global economy.

Thanks to Jonathan for replying to my post. He also asked me to urge you to have a look at this video which explains why ODI thinks the ‘rules of the game’ are skewed in favour of fossil fuels. Enjoy.